Analysis: Trade Effects of the EU–Ukraine Deep and Comprehensive Free Trade Agreement

The free trade agreement between the EU and Ukraine (DCFTA) has resulted in their trade doubling. Further economic integration with the EU is important for Ukraine's economic recovery and future stability, according to a new analysis from the National Board of Trade Sweden.

Per Altenberg, what is the study about and why is it important?

At the request of the National Board of Trade Sweden, Bengt Söderlund, assistant professor in economics at Lund University, has empirically evaluated the trade effects of the EU–Ukraine Deep and Comprehensive Free Trade Agreement, signed in 2014 and implemented in 2016. As far as we know, this is the first time such a study has been conducted.

The study is important because Ukraine's decision to sign a free trade agreement with the EU was one of Russia’s motives for invading Ukraine in 2014. It also provides an indication of how significant EU integration is for Ukraine economically.

What are the conclusions of the study?

The study shows that the EU–Ukraine DCFTA has more than doubled trade between the EU and Ukraine. Compared to studies on the effects of other free trade agreements, this is a very strong effect.

According to a previous estimate from the National Board of Trade Sweden, EU free trade agreements boost trade between partners by 60 percent on average after ten years. The agreement between the EU and Ukraine thus appears to have had a stronger trade-promoting effect than the "average" EU free trade agreement. The study also shows that this effect begins even during the negotiation phase of the agreement.

What role can further integration, such as full EU membership, play for the Ukrainian economy in the future?

We know from experience that the eastern enlargement of the EU in 2004 had strong effects on trade and prosperity in the affected countries. A common estimate is that trade with other EU countries doubles over time as a result of membership. We can therefore expect that Ukraine will also see continued positive trade effects from EU membership.

Since the EU–Ukraine DCFTA already includes some elements that align Ukrainian legislation with EU single market regulation, some of the expected effects may have already occurred. We might also see more positive effects even before Ukraine becomes an EU member. This is in line with the purpose of so-called gradual integration.

Is it common for the positive effects of a trade agreement to be seen even before it comes into force?

Researchers have previously observed that the effects of trade agreements can be seen even before they enter into force. This is known as an anticipation effect and is believed to occur because companies adjust their investments and other strategic decisions in advance to benefit from the agreement. We see such an anticipation effect in this case, which is not surprising but interesting to note in light of previous findings.

Are there challenges ahead with EU accession?

Any economic integration that reduces trade costs leads to structural adjustment, as it allows countries to specialise in economic activities in which they excel. Ukraine has a large population, but its economy is relatively small compared to the EU as a whole. Therefore, no significant structural adjustment is expected within the EU as a result of Ukraine’s EU accession. Effects may occur in certain agricultural sectors, however, they are likely to be much smaller than feared by some EU farm lobby groups.

In Ukraine, however, structural adjustments can be expected to be more significant. At the same time, one of the motivations for EU membership is for Ukraine's economy to transform in the same way that, for example, Poland's or the Czech Republic's economies have transformed since EU accession. It is important to note that the positive effects of EU membership, such as increased prosperity, cannot occur without a significant structural transformation of Ukraine’s economy. This, of course, would not be desirable.